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The Fed Has a Warning on Trump's Tax Plan

YURI GRIPAS

By Michael Rainey

October 6, 2017

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While the September employment report relapsed Friday morning showed a loss of 33,000 jobs, the unemployment rate fell to a 16-year low of 4.2 percent, and most analysts agreed that the hurricane-driven report showed no real break from a positive underlying trend.

National Economic Council Director Gary Cohn discussed the report with Bloomberg TV’s David Westin, who asked about the need for tax cuts given the economy’s continuing signs of strength: “Has it ever been the case in history that we’ve had a massive tax cut with this employment situation, particularly that will involve deficit at least in the short term? Have we ever done that in this country?”

Cohn agreed that the data looks strong and that the economy has seen “a couple of good quarters” sparked by the Trump administration, but needed an additional boost to get above 2 percent annual GDP growth. When it was pointed out that most economists doubt that a sustained growth rate of 3 percent is possible, whatever the tax structure, Cohn said that President Trump’s economic agenda calls for faster growth and that tax reform is the way to get it: “We believe we can have 3-plus percent growth with taxes and the regulation reform that we’re after now.”

While the debate over the connection between tax cuts and economic growth will no doubt rage for months as Congress wrestles with its tax bill, concerns about the need for tax cuts at this point in the economic cycle inspired one powerful institution that usually stays on the sidelines on fiscal matters to speak up. On Thursday the Federal Reserve warned that the Trump tax plan could cause inflation while adding to an already enormous federal debt. According to Reuters, “Federal Reserve officials questioned the rosy Republican scenario, saying that proposed tax cuts could deliver a short-term growth surge but also bring high inflation, burdensome government debt levels and an eventual return to sub-par economic growth.”

Fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget struck a similar note, telling NPR: "If we have a tax cut right now at a time when the economy doesn't need stimulus and our debt is at near record levels, that will do a lot of damage for the economy and it will be a huge missed opportunity."

Disclosure: The Committee for a Responsible Federal Budget receives funding from the Peter G. Peterson Foundation. The Fiscal Times is separately funded by Peter. G. Peterson, and is editorially independent.